When Patterson ($PDCO) beat fiscal second-quarter sales and earnings estimates on Thursday, the Minnesota-based medical equipment distributor credited the strong performance largely to its veterinary division. Sales in that unit increased 22% year over year to $376.5 million, helping to push earnings per diluted share for the full company up 12.5% to 0.54.
Patterson also distributes dental equipment and supplies for medical rehabilitation facilities. Its dental division did well--second-quarter sales grew 7.5% year over year to $601.7 million--but the medical unit lagged, with sales bumping up just 2% to $125.1 million. Some analysts are predicting that Patterson will cast off its medical division so it can focus on its higher-growth animal health and dental units.
|Patterson CEO Scott Anderson|
Patterson's animal health division was boosted by its 2013 acquisition of National Veterinary Services (NVS), the United Kingdom's largest veterinary distributor. With the addition, Patterson gained significant market share in that region, CEO Scott Anderson told investors during a conference call after the earnings release. He added that the company's strategy going forward in the veterinary market would be "to focus on increasing the diversification of both our equipment and technical service offerings, in order to take advantage of favorable marketplace dynamics as pet ownership and the dollar amount people invest in veterinary care for their pets continues to grow."
An analyst at Seeking Alpha responded to Patterson's unexpectedly positive earnings report with a prediction that the company would continue to benefit from "the love affair pet owners have with pets in the U.S." Although profit margins are higher on the human side of the equation, Patterson's medical division has faced growth challenges from shrinking Medicare reimbursement rates and continuing cost pressures brought on by health reform, the author points out. High out-of-pocket spending by pet owners "reduces the threat of reimbursement pressures that occur in the healthcare industry," Seeking Alpha says.
The biggest concern analysts expressed during the earnings call about Patterson's veterinary division was the termination of its partnership with diagnostics maker IDEXX Laboratories ($IDXX). IDEXX recently moved to a direct sales model, which negatively impacted revenues of some of its previous distributors, including MWI Veterinary Supply ($MWIV). But Anderson said IDEXX's change would have "no material impact" on Patterson. And last month, Patterson formed a strategic partnership with Abaxis ($ABAX) to sell its fast-growing veterinary diagnostic products.
If the speculation that Patterson is prepping for a sale of its sleepy medical unit proves to be true, it would "strongly reward shareholders over the long term," the Seeking Alpha report states. No doubt investors are catching on to the potential for Patterson to benefit from the fast-growing veterinary market: The company's shares have risen 20% in the past 6 months to $46.60.